3 Renewables Obligation (RO) Drax announced conversion plans and financing predicated on three units under the RO scheme Support mechanism for renewables since 2002 Well established, functioning market Closes to new projects in March 2017 Replaced by CfDs (1) 2014 to 2017 new projects eligible to apply for either RO or CfD For biomass conversions: Support deemed to start in 2007 RO ends 2027 Each unit conversion a separate project For Drax: First converted unit will remain in the RO Support grandfathered at 1 ROC (3) until 2027 Subsequent conversions before 2017 may be RO or CfD Any units converting after 2017 will be CfD Conversion ( ) to sustainable biomass offers a quick, costeffective way to rapidly decarbonise electricity generation in the short to medium term, as well as contributing to security of supply EMR (2) Delivery Plan (July 2013) (1) Feed-in Tariff with Contracts for Difference (2) Electricity Market Reform (3) Renewables Obligation Certificate Drax Group plc 3

5 RO Pros and Cons Advantages Disadvantages Well established and functioning market Potential to benefit from positive power price movements (e.g. capacity squeeze) ROC support levels for conversion now set and grandfathered until biomass support expires in 2027 Easy for suppliers (i.e. Haven) to manage on an annual basis and generates positive working capital for suppliers ROC price indexed to RPI Exposure remains to power price falls, driven by gas prices or removal / re-profiling of the carbon price floor Some political risk remains Buying power rests with the major suppliers, who have a choice to purchase ROCs (at a discount) or pay the buy-out Creates working capital issues for generators, as payments typically settled in August following the end of the compliance year Potential to benefit from higher recycling fees if there is a shortage of ROCs in any year DECC now consulting on measures regarding the transition from RO to CfD RO setting may move to February each year from the previous September more accurate RO setting Fixed price ROCs may be introduced from 2017 Drax Group plc 5

6 CfDs Background Future support regime for low carbon generation CfD characteristics Private law contract Term of support limited to 2027 for converted units Designed to deliver stable revenue through difference payments to sales in power market Draft strike prices published June 2013 Set at a discount to RO to reflect lower risk Consultation underway Payments under CfD funded through a levy on electricity suppliers Contract terms under development by DECC in close consultation with industry /MWh Draft CfD Strike Prices /MWh (1) Onshore Wind Offshore Wind Biomass Conversion (1) In 2012 prices and subject to consultation CfD Mechanism Illustration Pay back the excess if price over 105 Receive top-up payment to Top-Up Payment / Receipt CfD Strike Price UK Power Reference Price Drax Group plc 6

7 CfDs Investment Contracts and Enduring (2) Early CfDs run under the FID process Known as Investment Contracts Drax second and third unit conversion being considered by DECC for investment contracts DECC to publish final strike prices December 2013 Award dependent on specific selection criteria, if total eligible projects exceed budget capacity Effectiveness conditional on approval by Parliament of Energy Bill and EU approval under state aid provisions Standard CfDs the enduring CfD process Targeted for applications in H Drax units not operating under RO or contracted under FID CfD eligible to apply Initially, CfDs will be allocated with strike prices that are set administratively by Government Competitive process to be instituted if strong investor interest relative to budgets Drax Group plc (1) Final Investment Decision 7 (2) Levy Control Framework

8 CfDs Pros and Cons Advantages Bilateral contract with a Government owned counterparty Reduced political risk Provides revenue certainty and therefore protection against downside power price scenarios positive ratings impact Working capital benefits difference payments payable shortly after generation Disadvantages Caps upside from high power prices Still exposed to fuel price volatility, including foreign exchange movements Clarity on regulatory position likely to happen in stages CfDs could be an attractive option for Drax Reduce political risk Provide more earnings / cash certainty But subject to outcome of: Price and contractual consultations Competitive process Other key issues still to be resolved Payment mechanics Change in law provisions Pass through of industry charges Consistency with RO on sustainability issues Termination and suspension rights Allocation process and triggers for auctioning State aid approval Drax Group plc 8

10 Capacity Mechanism Capacity mechanism being developed under EMR Ensure security of supply in the face of falling reserve margins Proposed process now published Two auction processes to be held four years ahead and one year ahead of delivery year All generators mandated to go through pre-qualification process, but are not required to bid New capacity providers bid volume into an auction four years ahead of the delivery year - e.g auction for delivery in Winter 2018/19 RO or CfD-accredited plant not eligible to participate Existing capacity providers able to bid for one year contracts Proposals moving in the right direction, but economics not currently compelling High penalty regime means risk / reward balance currently unattractive for Drax coal units Caps on auction bids unlikely to attract the new build capacity envisioned by DECC, particularly CCGTs We will continue to review proposals but work to do to create value for Drax Drax Group plc 10

11 Implications for Drax Capacity Mechanism RO and CfD-accredited units excluded from capacity mechanism Work to do to create value for Drax RO Plans for conversion developed and financed under the RO Investment case remains strong CfDs Potential upside from CfDs if risk / return balance attractive vs. RO Drax Group plc 11

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